BUYOUTS: YY Becomes First to Scrap Privatization

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Bottom line: YY’s abandonment of its privatization plan and concurrent share buyback look like savvy moves to build confidence and attract attention from investors, and could soon be followed by similar withdrawals by other big buyout candidates.

YY abandons privatization

Following a steady stream of signals hinting at new obstacles for US-listed Chinese stocks trying to privatize, social networking site YY (Nasdaq: YY) has become the first to formally abandon its plans to abandon New York.  I’ve been predicting that up to half or more of the 40-odd privatization plans announced since the start of last year could ultimately collapse, and have to commend YY for being brave enough to be the first to openly discuss the abandonment of its buyout offer. The original buyout group led by YY’s chairman and CEO could have easily just remained quiet on the subject until everyone assumed the offer was dead. But in this case they’ve taken the more responsible route of admitting to failure.

Investors seemed relieved at the announcement, bidding up YY’s shares by a modest 1.8 percent after it announced its abandonment of the buyout plan, as well as a separate new $200 million share buyback program. (company announcement; Chinese article) But it’s also worth noting that at their latest close of $38.82, YY’s shares are a full 43 percent below the $68.50 buyout price that the management-led group first announced nearly a year ago. (previous post)

Back when the plan was first announced, the buyout price represented a nearly 20 percent premium to YY’s shares. But since then the stock has moved steadily downward to its current levels, in sync with similar declines for China’s stock markets. Other companies to announcement privatization bids have seen similar erosion in their stock prices, prompting some to revise bid prices to lower levels. But many have simply remained mum on the matter, meaning their original offers may follow a similar fate to YY’s.

YY wasn’t too talkative in its breakthrough announcement, citing only “recent unfavorable market conditions” for the group’s change of heart. Its new $200 million share repurchase program is rather significant, representing about 10 percent of YY’s current market value of around $2.1 billion.

Similar Signals from 21Vianet

Last month, data center operator 21Vianet (Nasdaq: VNET) gave off similar signals that it might be getting set to abandon its own privatization bid. Those came in the form of its announcement of plans to sell 1.75 billion yuan ($270 million) worth of convertible bonds, which could be exchanged for a major stake in the company. No specific amount was given, though the stake could be around 20 percent, based on 21Vianet’s latest market value. Such a plan seemed inconsistent with its earlier privatization bid, leading me to speculate that 21Vianet had quietly abandoned the de-listing plan. (previous post)

Many of these buyout plans looked shaky from the start, as most seemed to be backed by opportunistic private equity expecting to make some quick profits by quickly re-listing the companies in China at much higher valuations. Since then, however, China’s securities regulator has slowed the rate of new IPOs to a crawl, in response to market volatility. Many companies were hoping to circumvent that problem by making backdoor listings using existing shell companies. But the regulator has also recently clamped down on that process. (previous post)

I’ve previously said that New York may not be as unfriendly as these Chinese companies believe, even though many complain that their stocks are undervalued by US investors. Sector leaders like 21Vianet and even YY have exciting stories to tell that could boost their share prices, but are simply being lazy by failing to publicize those stores and expecting investors to come to them instead.

Then there are other privatizing firms that really aren’t very high quality and really should go back to China, where local investors are far less discerning. But recent regulatory obstacles, and the complexity of the process, means that many of these companies are also likely to see their bids collapse. At the end of the day, formally announcing the abandonment of its buyout bid and the accompanying buyback program look like savvy moves to build confidence and attract attention among investors. Accordingly, I would expect to see a few similar announcements by larger firms, probably in the $800 million to $2 billion market cap range, during the summer months.

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